Making financial progress. Which scale to use?

Personal finance
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I have had this question in my head for long ago.

Consider a below scenario:-

The society on the whole sees if you have a car, house and income of 80+k, you are already well settled. You are considered rich or well settled. Now this is just a skewed example but I am pretty sure most ideal definition of society’s rich Is something like this. Even if someone is settled in abroad say in US paying home loan there , they are considered wealthy.

The questions I have are below?

A. Who is the real rich ? How to measure progress ? Should we use balancesheet or society standards to measure progress?

Based on above scenario. Are they considered rich? Are they actually rich? I am asking because when I look at their balancesheet, their net worth is in negative especially home loan just pulls them all into -ve. Even for people living in abroad , they all have mortgage there so their balancesheet is negative too.
Personally:- I am not comfortable with having sleep everyday thinking about paying EMI. Do let me know your perspective?

Only confusion is society has a different scale where they don’t see balance sheet but rather a schizoid set of parameters like (have car, house , status etc) . From a society view a person is rich but from balancesheet view they worse than beggar with net worth in -ve. Which one scale should we use to measure financial progress? Balancesheet at the end of year or check if we have hit society kept standard

The second question is based on above .

B. If we have measuring scale of our financial progress, how to move forward? What’s the guidance here ?

i. So if we are measuring ourselves based on balancesheet? What should be our goal ? It states clearly that we need to less liabilities to make net worth high? So every year, do we aim to increase income generation and increase accumulation of assets i.e MF, bonds , real estate (without loan)? What should be the guidance ?

ii. So if balancesheet is not seen as a measuring stock, having society’s standards, I see that getting certain stuff is called making Progress. Okay if that’s the case, consider like all the basic stuff has been done fully paid car, bike, decent bank balance, MF investment and fully paid house. Should one take loan again to buy real estate or always be in debt acquiring assets (note :- exception bussiness). I mean should one only see if we are able to pay off EMI and have stuff. If yes, how much % of income should be EMI? What’s the guidance here?

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  1. Loan is two side of a coin. I would say its the greatest invention in financial world , basically you own stuff today when you need most in expense of tomorrow. Home, Car etc. if bought by careful financial planning i don’t see it bad even -ve balance sheet. Mind you some one who is giving you loan is in more risk then you taking it.

  2. Everything even govt run on loan. 20-25% of all out country taxes went into interest payment( loan repayment) etc.

  3. Your young want to travel you can definitely take a loan and explore world rather than doing same at age of 60 when you won’t enjoy that much so basically you are buying future. Same with bike and cars. That’s where personal finance knowledge kicks in how to leverage these instruments , if you take too much too repay than not worth it.

  4. All the Tech. growth we are seeing is because of loan. Mind you , Equity is also a kind of loan.

  5. measuring scale of our financial progress >>> See this is very personal in nature so no right or wrong.

  6. For me , if i can do what i want with my time without worring about my expenses than that’s the nirvana for me .For others it may be something else.

  7. For me whatever is in my bank account that its the real asset .

  8. Society is just in your mind what you expect from others. No one cares these days if your rich or poor.so stop wasting what other perceive rather what you want in your life.

  9. So , no one in the world can give you advice on how much loan you should take.

  10. If let say i bought a car which i feel i can pay emi . I will plan and make sure i can easily pay for x month. I will go for it , if let say i feel after some years that deal wasn’t worth than may be i will sell the car or i will buy second hand to make my finance.

  11. There is no fix answer you see everything you have to plan, also money is just a tool what’s the point if you can’t use it to better your life. Off course no one is asking for spend on things you don’t need.

  12. Rat race , what society thinks , growth is just in our mind , world is too big .There are people who understand these things and are doing well.

  13. All your points comes to “Personal Finance” so its you who only are best to think . If loans betters life and you can manage emi than why not take it?

3 Likes
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Ohh , this is a real thing. Only confusion for me was like a beggar has 0 balancesheet while rest have -ve yet why Is beggar seen poor, when others are -ve? :sweat_smile:.

C’mon man, how can we compare ourselves to govt or Central Bank. They have a printer, if they can’t service debt, they can print and buy their bonds back. If I print notes and give it to banks after taking loans, I will be in jail :sweat_smile:

I was told to take productive debt like education loan, or home loan, not car loan or travel loan. Like on things that will pay more for me in future.

That’s a good perspective actually! I have never seen this perspective . Always thought I should be wealthy enough to buy everything in cash in hand at snap of a finger!

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There is one begger in mumbai who has 7 cr and has property :stuck_out_tongue: Who is Bharat Jain, the world's richest beggar with a net worth of ₹7.5 crore? | Mint

Point is if can repay debt without stress and win win your living your future now.

They even can’t print everytime , see we may crib about capitalism but this system has given growth and innovation which no other sytem ever di in our history.

Again as i said money is just a tool , a tangible thing for your productivity which you can use in future . Nothing else , you won’t take single penny when you go to heaven :stuck_out_tongue: sabh yahi rehjayega :stuck_out_tongue: . So , goal should be to have enough to not be worry about future expense not the goal to just accumulate and spend nothing

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I have another question as well. Say we are having portfolio. Like 70% equity (index , mid cap etc), 10% bonds, 10% gold.

Now if I buy real estate on loan or say I buy a house on loan, how should I see the portfolio now? Does it imply I am too much invested in real estate? Or like that should be considered separate?

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I have simple funda, buy home only if you live in it for at least 5-10 years and don’t see it as an investment . There are so much maintance cost which people don’t calculate and if its not good quality then renovation cost is also too much as compared to rental and capital appreciation. + its very illiquid asset and rate depends upon buying cycle.

So if your living than the place would be more than just a investment , you will have many memories and social circle around + you won’t be worried about land lord increasing rent and moving place to place every few years. so , best is keep it separate where you don’t track it or if you have

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Leverage is good when used well. Unless you are salaried employee, some amount of financial leverage is good for your balance sheet. Wealth is built by people who use leverage well. If I can generate 20 percent per annum in my business why should I use that money to buy a car when I can get it at a lower rate from bank. So that’s why I said only if you are salaried employee where you do not have alternate use of funds then loan is bad for you.
If you ask me, no matter how much cash I have, I always go for loan to buy a car or a house.

Now to your question of who’s rich? One is richer than the other, unless you are the world richest person. I don’t think anybody can give an answer in terms of money value.

One thing that I didn’t understand. How can one have negative networth if he takes a housing loan or a car loan?

1 Like
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Ohh it was written balancesheet is basically net worth = assets - liabilites. In liabilities it is said to include outstanding loan amount. This is how you prepare balancesheet right ?

I am not sure about car loan , but home loan yeah , chances are lot balancesheet would be -ve. Unless some extra capital arrived from other source bussiness, earnings from abroad, family wealth, I certainly don’t think anyone would have assets worth more or equivalent to the debt of a house.

Is this the target rate for leveraged bussiness. Say like I am taking loan and if make more than 20% , I should take loan?

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Bank NII(gross margins) is around 2-3% , so for me even if i know i can definitely earn x% after considering every unknown cost which is larger than interest rate pay, i will too take the loan( considering impact on taxes as well). Net your money is earning more for you right, thats why my majority of purchases are on credit cards, i get Interest free money plus close to 7-8% rewards points.

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Correct.

When a housing loan is given, it’s given usually only to the extent of 80 percent of the value of house. Again, the value of land is not considered.
These are secured loans to the bank. If you are saying the value of property is less than the value of outstanding loan, then what’s the point of calling them secured loans. So at any given point of time, the value of house is more than the value of loan.
Same thing holds good for car too.
Now if loan is taken by manipulating some accounts, then it’s a different matter.
So I can say at least 99 percent of the time loan outstanding is less than the value of the house.
Hence networth is positive most of the time.

For unstructured business I would say this is the bare minimum. If you are working hard in your business and not generating 20 percent it’s not worth it.
Theoretically if you can generate anything more than your cost of capital, then leverage is good. We call this as financial leverage in business terms.
Even if you have margin of 5 percent, you need to just have asset turnover of 4 times to make 20 percent.

1 Like
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I do the same. It makes a lot of difference when it accumulates.

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There’s good news & bad news.

The good news is that you define what is your problem statement. You can pick your material goals, place guard rails for things you are open or not open to do - essentially design every aspect of what being rich means to you. That’s also the bad news, you are the only person who can define what it means to be rich :sweat_smile:

Once you know what you are trying to solve for through your finances, it becomes fairly simple to figure how you want to track your progress.

2 Likes
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Rich people build assets & these assets give them income. Same way liabilities will take away your money.

The society might think you have a beautiful car and you are rich. If you spend money on your car - its a liability not an asset. Again you might need some vehicle for commuting, reaching office etc - so its a compromise you are willing to take.

Same is the case with house. And its quite complicated to convince people that 1 house is not an asset - so let me stop there.

count the real things that will give you multiple streams of income - thats the easiest way to get rich.

Getting 10k each from 5 sources is much better than getting 80k from a single source.

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IMHO, in absolute terms, neither of the scenarios quoted are actually rich.
Being leveraged (liabilities, debt) is slightly worse-off in terms of freedom of choice.

@raoawesome i would like to suggest this series of 6 articles
to help you decide for yourself with confidence. :slightly_smiling_face::+1:

Here’s some food for thought -
After, one has achieved financial independence,
all subsequent financial queries are in the territory of - " What’s the meaning of life? "

In other words…

1 Like
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Great question!! The way I see it -

I think there should be a third option other than balance sheet and society standards - it is - to set your own standards to define richness and there should be an element of enough (finite) in it - because life is finite.

Let me explain both the aspects with following anecdotes -

I heard this story from someone where this boy’s father during his early years - before going to restaurant - used to make all of the family eat some form of junk food or filler so that in the restaurant - they don’t have to order costly starters. The boy thought that only the rich order starters. That became his definition of richness. Once he grew up and got steady cash flows - whenever he went to the restaurant - he always ordered lots and lots of starters. That made him feel rich.

I think there is a lot of truth in it.

Now, if the question is about “the real rich” - I think - that is a person who has “Enough.”

From “Psychology of Money” by Morgan Housel -

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.”
Enough. I was stunned by the simple eloquence of that word—stunned for two reasons: first, because I have been given so much in my own life and, second, because Joseph Heller couldn’t have been more accurate.
For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails.
It’s so smart, and so powerful.

On your second question -

If it is strictly about measuring “financial progress” and the confusion it is causing around liabilities, assets, loans, cars, houses, etc - all that can be eliminated by “Discounted Cash Flow” which is the basis of Warren Buffett pricing model for companies and its future potential / expected progress. It takes into account ability to service the debt and hence will clear the confusion about person having a shiny car and house but negative balance sheet. It is applied on companies while doing fundamental analysis and you can apply the same on the person and adjust the projection as and when past and newer data becomes clear.

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“Man will always be a man. There is no new man. We tried so hard to create a society that was equal, where there’d be nothing to envy your neighbour. But there’s always something to envy. A smile, a friendship, something you don’t have and want to appropriate. In this world, even a Soviet one, there will always be rich and poor. Rich in gifts, poor in gifts. Rich in love, poor in love.”

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Screenshot_20230718-1141281080×1160 138 KB

The real question is do you have enough to meet your material needs and desires. For each individual this would vary. There is no one measuring scale that would appeal to everyone.

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How about how comfortable you feel to leave the work that you do and sit in a beachside villa

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Well essentially from speaking with everyone , this is what they told me as far as home loans and this what I understood.

So they said like rent is a expense, a wasteful expenditure. So they said like to save rent and have a investment , home loan Is the way. And it’s quite true because we still have a long position on house till we are paying EMI. So i thought house or home loan is a leveraged investment with high expense ratio with crazy entry load(buying house, registration, etc) and exit load (again selling house , registration etc) with illiquidity. The only downside is lost opportunity cost to divert funds to other things like equity, gold or even on onself(bussiness, education, upskilling)

Only thing for me was when I look at portfolio perspective, I was wondering like is everyone else out there too much into real estate with leveraged investment. In terms of % of asset class real estate takes up the majority of space

Ohh I asked from the perspective of overall portfolio. I mean how much % of real estate is present in portfolio. Simple, how much % of money is in real estate based on overall portfolio?

All I can say is, as algo eye says I think it’s better not to add home loan to portfolio, I guess although home loan is an investment too which is weird.

Coming back to balance sheet question. It’s assets - liabilites. So do we take the net worth of house in asset column too even if house is still under home loan ?

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This discussion is very great. Valuable points here. There is one more important thing here, I want to know.

So for leveraged bussiness we aim for 20% + or more.

How much % of capital should be margin ?

Like say you have 1cr, and you are gonna take bussiness loan to aim for 20% return. How much % of 1cr(or equivalent assets) should be used to as margin(down payment for loan taken from bank) ? Simply put how much % of overall holdings should be used to take loan for bussiness?

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personally i purchased 2 plots in 2010 with a 10 year loan, the interest component was 60% of the land’s cost. Now my selling price has to be 2x to break even - and nobody is ready to buy currently for that price!

maybe it will be worth 20 or 30yrs hence - but with the current conditions, i dont prefer to get into land anymore!